The first function or the primary function of money is to issue paper currency. The Central Bank has the sole power to issue paper currency. The notes are legal tender money. In India, the RBI issue currency notes of all types except One Rupee note which are issued by the Ministry of Finance, Govt. of India. But the notes are issued following some methods. The Central Banks follows different methods or system according to the currency or banking regulations to issue notes. 

These systems are:

(a) Simple Deposit system/Full reserve system.                              

(b) Fixed fiduciary system.

(c) Proportional reserve system.

(d) Minimum reserve system. (Followed in India from 1956 onwards)

(e) Maximum reserve system.

Major Principles of note issue by Central Bank

(i) Currency Principle.

(ii)Banking Principle.

1. Currency Principle: Under the currency principle, the Central bank is supposed to back the issue of currency with an equal amount of gold and foreign currency.

2. Banking Principle: In banking principle, like the commercial banks, the Central bank will keep a certain percentage of gold and foreign currency for backing the entire note issue. We see in the day-to-day banking business that the commercial banks do not keep the entire depositors’ money as cash in hand.

Only a small portion of the depositors’ money is used for cash in hand and the rest is given as loan. The same way, under the banking principle of note issue, with limited amount of gold and foreign currency reserves, the Central bank resorts to issue of more currency.

The first function or the primary function of money is to issue paper currency. The Central Bank has the sole power to issue paper currency. The notes are legal tender money. In India, the RBI issue currency notes of all types except One Rupee note which are issued by the Ministry of Finance, Govt. of India. But the notes are issued following some methods. The Central Banks follows different methods or system according to the currency or banking regulations to issue notes. 

These systems are:

(a) Simple Deposit system/Full reserve system.                              

(b) Fixed fiduciary system.

(c) Proportional reserve system.

(d) Minimum reserve system. (Followed in India from 1956 onwards)

(e) Maximum reserve system.

Major Principles of note issue by Central Bank

1. Currency Principle.

2. Banking Principle.

1. Currency Principle: Under the currency principle, the Central bank is supposed to back the issue of currency with an equal amount of gold and foreign currency.

2. Banking Principle: In banking principle, like the commercial banks, the Central bank will keep a certain percentage of gold and foreign currency for backing the entire note issue. We see in the day-to-day banking business that the commercial banks do not keep the entire depositors’ money as cash in hand.

Only a small portion of the depositors’ money is used for cash in hand and the rest is given as loan. The same way, under the banking principle of note issue, with limited amount of gold and foreign currency reserves, the Central bank resorts to issue of more currency.